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Case 12 05: Aren’t We Done Yet?

819 words - 4 pages

Case 12-05

Aren’t We Done Yet?

LabCo is a large construction contracting firm that serves a variety of industrial

customers that purchase machinery and equipment from LabCo. LabCo’s business

primarily involves the design and manufacture of large industrial-sized machinery and

tooling that is used by its customers in manufacturing parts and components for fighter

jets, transport planes, and other aerospace-related machinery and equipment.

All of LabCo’s construction contracts involve the design, development, and manufacture

of machines that are unique and customized to the specifications of its customers. LabCo

...view middle of the document...

Upon

entering into the contract, LabCo realized that this was a unique arrangement that

required a great deal of customer specification in order to meet required performance

standards. However, LabCo also believed that with its extensive experience performing

under similar contracts, including previous contracts with Halibut, the percentage-ofcompletion method of accounting for the new Halibut contract was appropriate.

After the commencement of the new Halibut contract, LabCo began to experience

significant difficulties in the design and manufacture of the six-axis laser cutting

machine. Initial designs had to be redone, certain engineering costs had to be outsourced

to a significant extent because of the termination of a very experienced and key member

of the engineering team, and the cost of steel used in the frame of the six-axis machine

had risen unexpectedly. These changes led to a revision of LabCo’s estimates for the

overall cost to complete the contract, and because of these cost overruns, LabCo expected

that the overall project would incur total costs that would be in excess of the total fixedfee contract price negotiated with Halibut. LabCo management updated its estimates used

in percentage-of-completion accounting to reflect both the cost overruns incurred as well

as the cost overruns expected to be incurred. LabCo management also recorded a

Case 12-05: Aren’t We Done Yet? Page 2

provision for the entire loss on the contract in the period in which it became aware that

contract costs would exceed the total contract value.

After a further six-month delay in the design and construction, LabCo...

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